NZD tops the leaderboard as the USD shows broad-based losses

On a light news day, global equities and rates have drifted lower and the USD has showed broadly based losses.  The NZD tops the leaderboard, up 0.6%, which is somewhat of a mystery.

It’s been tough scratching around for any news that might have driven markets overnight and I’ve largely come up empty handed. The best I can come up with is a 10% fall CSX, an international freight company based in the US, which flagged a softer revenue outlook and the veteran CEO citing that the present economic backdrop was the most puzzling he had seen in his career. We can probably link this to the US-China trade war, the impact of which is broadening across the globe and gathering steam.  US freight indices are heading south, suggesting that the trade war is spilling over into the US economy. The Fed’s Beige Book released this morning says that concern is widespread on the negative impact on trade uncertainty. The S&P500 is currently down 0.4% led by a 1.8% fall in “Industrials”.

In economic releases overnight, UK CPI inflation data were in line with market expectations, of 2.0% for headline and 1.8% for core. The same can be said with Canada, with both headline and core rates (the average of the three series the BoC monitors) at 2.0%, the only major central bank with core inflation bang on target. US housing market data were softer than expected, with a drop in the volatile multi-family units responsible for the chunky miss in permits. None of these data releases had any notable impact on the market.

US Treasury rates are lower across the curve, led by the long end, with the 10-year rate down 4bps to 2.06%. That rate looks like it is tracking back lower after meeting some resistance at 2.15% late last week.  Lower European rates have likely had some influence on the Treasuries market.  French, German and UK 10-year rates were down between 4-6bps.

In currency markets, movements have been fairly modest although there has been notable underperformance by the USD – showing broadly based falls, albeit down by only 0.2% on the indices we track – and notable outperformance of the NZD, which heads the leaderboard. 

The NZD is up 0.6% to 0.6740, breaking up through technical resistance between 0.6730-6740 in the early hours this morning, peaking at 0.6747. With higher highs since the start of June, a slight upward trend is now more evident. With risk-off conditions evident, there is no fundamental reason for the strength over the past 24 hours but we can put together the following possibilities: (1) seasonal factors, with the NZD up 8 out of the past 10 July months, perhaps due to a lack of vol during the Northern Hemisphere holiday period; note that it has fallen in 8 of the past 10 August months; (2) the NZD is playing catch-up to fundamentals, heading up towards our short-term fair value model estimate of 0.68-0.69, after spending a few months on the cheap side of fair value; (3) some gamma hedging in the options market that might soon fade; or (4) speculators with short positions closing out, losing patience as the NZD holds up. 

NZD outperformance sees some fresh “big figures” on the crosses, with NZD/AUD breaking up through 0.96 and NZD/EUR up through 0.60.  NZD/GBP and NZD/JPY are 0.3-0.4% higher at 0.5420 and 72.8 respectively.

In the day ahead, Australian employment data are important for RBA rate cut expectations, with the central bank focused on the labour market.  How much further the RBA cuts rates is a likely factor in the RBNZ’s rate cut decision tree, so these figures are important for both the NZ and Australian dollars and rates markets.